Why Bernstein’s Toni Sacconaghi is bearish on Apple in a recession

“The companies in our universe vary widely in business composition, and we maintain that those with the most recurring revenue and profit are least at risk.”

From a note that landed on my desktop Saturday (sent to Bernstein clients Thursday):

During the Great Financial Crisis, virtually every hardware category (servers, storage, PCs) saw 20%+ revenue declines in 2009. That said, the companies in our universe vary widely in business composition, and we maintain that those with the most recurring revenue and profit are least at risk. For instance, 60%+ of profits are recurring at IBM, which saw limited EPS revisions and outperformed by 2000+ bps during the GFC. In contrast, companies with more transactional business models such as Dell underperformed by 2000+ bps. Currently, IBM and HPE screen best in terms of recurring profits.

So how do we think about our stocks in the face of a potential recession? IBM’s financials are very likely to hold up best, though its stock price may already be reflecting it (EV/FCF = 15x). We continue to rate DELL and HPE outperform – We see risk/reward on AAPL and HPQ as neutral to potentially negative…

Apple – most transactional revenue model. Apple has been the poorest performing stock in our IT hardware coverage YTD, driven by valuation (AAPL entered 2022 trading at 30x P/E, a 40%+ premium to the market) and increasing concerns about its consumer exposure. Looking forward, Apple is the most transactional company we cover (an estimated <10% of revenues and profits are recurring, from select parts of its services portfolio) and its valuation remains elevated vs. history (20x P/E or 31% premium to the market Exhibit 19) and its FAAMG peers. Bulls argue that Apple’s premium price positioning make it less vulnerable to a recession, while bears assert that Apple over-earned last year amid the pandemic, and profits will invariably mean-revert over the next few years. We lean more towards sentiment in the latter camp, and see risk-reward on the shares as neutral to modestly negative.

Maintains Market Perform rating and $170 price target.

Cue Exhibits 2 and 12:

My take: IBM’s over-performance is interesting, but given how many people buy the latest iPhone each year and trade in — or hand down — the old,  iPhone purchases may be more “recurring” than Sacconaghi allows.